Why should I care what an investment manager does?

Investment managers play an integral part in long-term financial planning, yet Schroders Global Investor Study reveals that the majority of investors don’t know what it is they do. Here, we explain where investment managers fit into the investment process and why investors should care.

12 Sep 2016

Sheila Nicoll

Head of Public Policy

30 MinutesUnstructured Learning Time

Would you be able to explain what an investment management company does? It’s highly likely you are already a customer: if you have any sort of company pension then there is a very good chance that an investment manager is working for you.

Despite this, a large chunk of investors do not understand the role of the investment management industry, even those who already have sizeable amounts invested.

As part of the Schroders Global Investor Study, we asked 20,000 investors from 28 countries for their understanding of what an investment management company does. Each had the equivalent of at least €10,000 invested, aside from pensions and property investments.

What is an investment manager?

Yet despite this level of engagement, more than a quarter of respondents confused the role of investment manager with that of a financial adviser: 27% said such firms “provide investment advice and recommend suitable financial products in which to invest”.

We offered five descriptions of an investment manager. Only 37% of respondents picked the correct answer that an investment manager “manages money on behalf of clients, pooling their funds into various long-term investment strategies”. 12% confused investment managers with the role of an investment bank. 10% even thought investment managers were retail banks.

But is this so surprising? Investment managers have for decades quietly operated in the background, looking after pension savings and other investments, often without the end investor needing to be fully aware of the process.

Time for change?

In the past most pensions were “final salary” or “defined benefit” schemes (so called because of the certainty of a particular income paid in retirement). Few members of these schemes realise that their employer entrusts the growing of the assets to investment or fund management companies, (“fund manager”, “investment manager” and “asset manager” are generally interchangeable terms) such as Schroders and its peers.

But this awareness of investment managers is slowly changing, in part because of the way we save into work pensions.

The prevalence of final salary schemes is declining and the use of defined contribution (DC) schemes is fast increasing. With DC, the employer makes no guarantee on what the retirement income will be. Instead, it is determined by the amount invested and how the investment performs, so the employee takes on the risk.

It means the members of these schemes need to be more engaged. They need to know more about how their money is managed and the returns being achieved.

But is this understanding of investing happening quickly enough?

Most countries face daunting gaps in the amounts being saved that may leave countless millions with retirement income far below the 70% of salary recommended by the Organisation for Economic Co-operation and Development (OECD).

Voices from many quarters have called for policies to dramatically increase the amount saved, and some governments are responding.

There are many ways the investment management industry can help, but one basic plank is to help consumers understand not only the merits of investing but also to explain what they do and how they work to support individuals.

This can only help in turning more people into investors, helping them meet their financial goals.

Misplaced belief in the understanding of investments could hurt investors planning their financial future. However, a strong desire to learn and seek advice from financial professionals presents a perfect opportunity for the investment industry to engage with consumers.

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